The fastest and surest way to increase profitability in a firm is to stop losing money, and the surest way to stop losing money is to stop saying "yes" to requests for services that are outside of your core competency.
Whether it's Intel, Dell Computer, Southwest Airlines or your A&D firm, all successful companies have developed strategies to cope with the complexity of the marketplace. Due to that complexity, even large firms have learned that they can only excel in one or two areas. Sure, they can be good in many and competent in most, but their core competency is still that one thing around which all of their investments, training, hiring—even their culture is based. For Intel, it's R&D. For Dell, it's the direct-to-consumer model.
And for Southwest Airlines, it's the low cost associated with short routes and quick turnarounds. And for your firm? What is the one thing you must absolutely excel in to be the best in your niche? Is it design? Or is it hiring and training? Operational efficiency? Supply chain management? It may take some time to answer that question, but once you do, you can then ask a series of equally important questions, namely, "Why do we continue to do so many other things?"
As your business grows and you focus on growing the top line (sales), it is all too easy to say "yes" to every request that comes your way. I call this "Claudia Post" disease after a woman I featured in my book, Your Business or Your Life: 8 Steps For Getting All You Want Out of BOTH.
Claudia started a courier service and grew it to over $3 million in three years. During that time, she had expanded from what she considered the heart and soul of her operations—bicycle messengers—into trucking, air freight, parts distribution and a handful of other services that her customers had asked her for. Whenever they asked, Claudia was quick to say "Yes!"
What Claudia couldn't understand was why her "growing" business, never had enough cash. She wondered why she had to forego her own paycheck so often, and why she eventually had to sell her personal assets to meet payroll— including pawning her family heirlooms. She was winning awards. Her picture was on the cover of chamber of commerce magazines. Her business was "growing"… and she was quickly going bankrupt.
For Claudia, the tide didn't turn until she was carried out of her office on a stretcher and placed into an ambulance, the victim of fierce chest pains brought on by her anxiety. After that wake-up call, Claudia finally knew that things had to change. She hired a consultant who implemented a process known as ABC, or activity-based costing. In my book, this process is referred to as going from "clouds to columns."
The basic concept of ABC (about which I'll have more to say in the future), is that it is dangerous to look at a business with all of its sources of revenues, and all of its expenses lumped together in single "clouds." Instead, we must break out the sources of revenue by category and match them to the specific expenses that support them, "columns." Then, and only then, can we get a true picture of which products, which services—even which customers— are truly profitable.
And only then will we have the evidence we need to get rid of those that are not. I have seen the amazing results of this many times in my own consulting work. I once worked with a small firm that was generating about $1.5 million per year selling software, hardware and developing custom software programs. As you might assume, the hardware line had the thinnest margins, but contributed significantly to the top line. I convinced the owners that for a privately held company, the top line is largely irrelevant. It's the bottom line that matters. They dropped the hardware line, swallowed their pride as their sales dropped from $1.5 million to about $1.0 million, and learned to live with a net income that doubled once all the expenses that had been supporting the hardware business were eliminated. They did less and made more.
Claudia Post had even better results. Though she had been losing money in many of her service lines (including the bicycle messengers), with the consultant's help, she eliminated several offerings and scaled back her overhead. She not only became quickly profitable, but cash flow turned—and stayed—positive.
By doing less, Claudia Post not only made more but also reclaimed her health, found time to work out, and, in her words, even found time to laugh again.
The more complex the business model, the harder it is to focus on that single core competency that all successful firms must embrace. In the A&E field, the constant struggles as to sources of revenue (hourly, cost-plus, square footage, products, etc.), and the matching expenses (overhead, staff, outsourcing, automation, etc.) make it all too easy to let layers of marginal decisions compound until the business, if not the owner, is going to be infected with Claudia Post Disease.
Has this happened to you? Do you have trouble saying "no" to opportunities outside of your core competency? If so, try moving from clouds to columns, and get to know the joy of doing less and making more.
David Shepherd is president of Designing Profits, Inc. His next major conference is "Designing Your Future," February 8-11, 2006 at the Bahia Principle Tulum on the Riviera Maya, Mexico. For information, please visit www.designing profits.com. You may send comments via e-mail to david@designing profits.com
